Turned 70 This Year? Know What the IRS Wants You To Do

Know What the IRS Wants You To Do

Every year, many retirees receive retirement funds that go into their IRA, SIMPLE IRA, SEP IRA, or retirement plan accounts. The funds that go into these accounts can stay unused until the retirees reach the age of 70½. Once they reach this age, however, they are required to withdraw a minimum amount every year, known as the “Required Minimum Distribution”, or RMD for short. Let’s take a closer look at what changes for those who cross this age threshold.

RMD and Applicable Tax Liability

Though the amount withdrawn is included in your taxable income, it may be partially or fully exempted, if a part of it was taxed earlier, or if the amount qualifies to be received tax-free. For instance, qualified distributions from designated Roth accounts may be tax-free.

Date for Receiving RMD

Typically, the last date for withdrawing RMD is December 3; however, those who have recently turned 70½ years and are first time recipients of these payments may receive their first RMD as late as 1st April of the following year.

For example, taxpayers who were born after June 30, 1944, and before July 1, 1945, will turn 70½ in 2015. Ideally, they should receive the RMD in the same year; however, as an exception for first-time RMD recipients, these taxpayers may receive their first RMD as late as April 1, 2016.

What if You Fail to Take RMD?

Taxpayers who take no distributions or withdraw less than the required RMD amount must pay 50% excise tax on the amount remaining in the account. In such cases, taxpayers must file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts.

What is Form 5498?

Each year, the custodian of a taxpayer’s account, usually the bank or a financial institution, mails a copy of Form 5498 to both, the taxpayers and the IRS. The form reports a taxpayer’s total annual contribution to their IRA accounts. It also identifies the type of IRS account that the taxpayer holds, such as traditional IRA, SIMPLE IRA, Roth IRA or SEP IRA.

Conclusion

Though the IRA custodian or retirement plan administrator calculates the RMD, taxpayer or IRA account holders should also calculate the amount of RMD. If it is inaccurate calculated, the RMD amount may be penalized. Account holders may request that the IRS waives the penalty. The burden of proof falls on the account holder to prove the fact that the shortfall was due to a reasonable error and that they are taking necessary steps to fix it.

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Turned 70 This Year? Know What the IRS Wants You To Do
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